Roku's Stock May See a 23% Price Swing After Earnings

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Roku Inc.'s (ROKU) stock has resembled a rollercoaster in 2018 with the shares rising and falling massive amounts. Despite the ups and downs, the stock is up 12% on the year, which is better than the S&P 500's rise of 2%. The high beta stock is about to see even more volatility come its way between now and year-end based pricing in the options market. 

One reason for that uncertainty is the company's upcoming third quarter results on November 7.

ROKU Chart

ROKU data by YCharts

Big Volatility Coming 

The options market suggests that Roku's stock may rise or fall by as much 23% from the $60 strike price for expiration on December 21, using the long straddle options strategy. It places the stock in a massive trading range of $46 to $74, a spread of $27.50. 

Implied volatility levels are very high for expiration in December as one would expect, at 82%. That is nearly five times greater than the S&P 500's implied volatility for the same expiration. 

Quarterly Results Loom

One reason for the high degree of uncertainty is the company's upcoming quarterly results. Analysts are looking for the company to report a loss of $0.11 per share. Meanwhile, revenue is expected to climb by 37% to $170.7 million.

ROKU Quarterly Revenue Estimates Chart

ROKU Quarterly Revenue Estimates data by YCharts

Upping Estimates

Analysts now estimate that the company will lose $0.14 per share in 2018, which is better than estimates in July for a loss of $0.28 per share. Currently, analysts see those losses narrowing in 2019 to a $0.01 per share.

Revenue estimates have increased as well and are now expected to rise 41% in 2018, up from prior forecasts for growth of 36%. Revenue growth for 2019 and 2020 have increased as well. 

ROKU EPS Estimates for Next Fiscal Year Chart

ROKU EPS Estimates for Next Fiscal Year data by YCharts

Analysts are predicting the stock will rebound 14% to an average price target of $65.85 from its current price of $57.89. 

Despite the rising estimates and analysts' price targets, the company isn't expected to earn a profit until 2020. That makes the stock very expensive despite being 25% off its 2018 highs. That is because analysts forecast 2020 earnings of $0.46 per share, giving the stock a 2020 PE ratio of 126. If the company can post strong third-quarter results and provide strong fourth-quarter guidance, perhaps analysts can raise estimates even higher. However, if the company disappoints it could lead to an even steeper decline for the stock.  

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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